Palladium ETFs See Outflows Even as Prices Hit New Highs

Going “platinum” used to mean something, but on Wall Street, at least in recent weeks, palladium looks like the only metal in the commodity complex going anywhere.

Palladium prices spiked through $1,400 per ounce last week, making records because of a number of issues, including multiyear supply deficits. Prices have come down since then, but an ounce of the dull stuff, a byproduct of platinum mining, is higher more than gold now, which traded below $1,300 per ounce on Tuesday.

As palladium futures spiked, a palladium exchange-traded fund,
Aberdeen Standard Physical Palladium Shares
(PALL), shot up to a record high last week. At the peak, it was up more than 65% from its August 2018 low. That kind of performance should be hauling in dollars from interested buyers, but the opposite has occurred. Although the Pall ETF’s assets have risen in the first few weeks of this year, its assets under management of $220 million are still below the $250 million it had around the same time last year, when palladium was trading around $1,000 per ounce.

China's economy grew at its slowest pace since 1990 last year. The 6.6% growth rate is due in part to the continuing trade conflict with the U.S. and China's efforts to get a handle on debt. Photo: EUROPEAN PRESSPHOTO AGENCY

That is probably because palladium ETF investors have been pulling money from these types of funds, with assets under management down more than 40% year-over-year even as palladium prices have rallied, according to a Bank of America Merrill Lynch report published on Monday. The steady outflow appears odd since ETF investors have a tendency to chase performance, but there is more going on underneath the surface.

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“Digging a bit deeper, these outflows have been driven by market participants buying shares in the physically backed ETFs and then requesting physical delivery of the metal, mirroring that [ETFs] are readily available source of palladium,” Michael Widmer, BofA Merrill Lynch metals strategist, said. Meanwhile, gold ETF assets are up nearly 5%, according to the report.

Basically, some of the buyers of palladium ETFs aren’t after the ETF shares, but the physical palladium backing the investment. That speaks to the commodity’s climb—while the metal is hot, buyers are going great lengths to dig it up.

Another factor driving demand for physical palladium is that costs have swung in favor of owning palladium outright rather than “leasing” it. In the past, corporate customers of palladium such as refineries “leased” palladium. But with short-term lease rates spiking 35% recently, those customers have decided to own palladium outright rather than lease it. This switch has also contributed to the rally in palladium.

The good news is the palladium craze is dying down a bit. Lease rates have come down to normal levels, suggesting the palladium fervor has cooled a bit. But don’t discount it yet.

“With the palladium market still in deficit, we expect prices to remain high,” Widmer said.

He raised his 2019 price target for palladium to $1,475 per ounce on Monday. That suggests palladium can rise another 13% from where it was trading Tuesday. A bit of warning, palladium could come with a dose of volatility—star commodities tend to be moody that way.

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